Consider a bullet portfolio of a single Treasury STRIP with maturity 12 months and face...
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Consider a bullet portfolio of a single Treasury STRIP with maturity 12 months and face value $100,000. Assume a flat spot curve, with y = 0.05 (semiannual rate). Consider now two Treasury STRIPs with maturity 6 months and 24 months, respectively. (a) Construct a barbell portfolio if the two STRIPs with the same modified duration and the price of the bullet portfolio. (b) Calculate the convexity of the bullet and the barbell portfolio. (c) Compare the price of the bullet portfolio with that of the barbell portfolio when interest rate decreases to y = 0.04 and when interest rate increases to y = 0.06. Consider a bullet portfolio of a single Treasury STRIP with maturity 12 months and face value $100,000. Assume a flat spot curve, with y = 0.05 (semiannual rate). Consider now two Treasury STRIPs with maturity 6 months and 24 months, respectively. (a) Construct a barbell portfolio if the two STRIPs with the same modified duration and the price of the bullet portfolio. (b) Calculate the convexity of the bullet and the barbell portfolio. (c) Compare the price of the bullet portfolio with that of the barbell portfolio when interest rate decreases to y = 0.04 and when interest rate increases to y = 0.06
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